Economic Outlook: A Last Farewell to 2014
- It’s tempting to keep looking in the rearview mirror at 2014 and making observations. We cannot do this forever, but just a final few observations.
- Remember the gloom and doom of the headlines about oil prices and the likely swoon in the economy around year-end? We now have the 2014’s year-end data on Personal Income and Consumer Spending. Despite the gloom and doom which dominated headlines at year-end, the data looks pretty solid. Personal income was up 4.6% for the year, and consumer spending increased 3.6%. [Dept of Commerce]
- Total Construction Spending increased 2.2% for 2014 [Dept of Commerce]. This has been on a downward trend but as we discussed with the housing numbers two weeks ago, housing could provide some pick up in 2015.
- Manufacturing survey data in the U.S. is still showing expansion, albeit at a somewhat reduced rate from what we observed earlier in 2014. The PMI Manufacturing Index came in at 53.9 [Markit] while the ISM MFG version came in at 53.5 [ISM]. The combined ISM (Services and Manufacturing) came in at 56.3 in January – pretty robust. That makes for the best January number in over 4 years.
- Initial Jobless Claims came in at the end of last week very low for second week in a row at 278,000 [Dept of Labor]. This accounts for a bit of firming in the bond market.
- The unemployment rate moved up slightly to 5.7 percent from 5.6, where it closed 2014. This rise, however, was accounted for by a surge in the labor force – the number of people looking for jobs. The labor force participation rate rose to 62.9 percent from 62.7 percent in December. It appears that some discouraged workers are returning to the labor force—a positive sign for how workers view the economy.
- Therefore, the current employment situation has to be counted positive despite the tick-up in unemployment rate. We’ve seen strong gains in new jobs. Payroll jobs gained 257,000 in January after strong increases (300,000+ in December and November) to close out 2014. December and November were both revised upwards by a net 86,000 jobs. With the revision, November is the strongest month for job growth since May 2010.
- Strategas Research said last week of the Employment Report – “If there’s going to be a “recoupling” of U.S. and other economies, today’s… data makes it more likely that foreign economies rise, rather than the U.S. falling.”
- The U.S. Trade Deficit increased to $46.6B from $39.8B, but this is almost certainly accounted for by the stronger dollar increasing imports and dampening exports. It is not surprising that the country with the most stable economy and highest growth rate would be somewhat of a magnet for foreign capital, increasing the demand for dollars.
- European Union PMI Composite rose to 52.6 in January from 51.4 last month, suggesting further energy in the region.
- German factory orders jumped 4.2% over the previous month in December which was quite a surprise. Consensus estimates were for a rise of 1.5%. Even the year-over-year number in a weak year finalized at +3.4%, which is not a terrible year.
- When you dissect the German data, it is interesting to note that orders from within the Euro-zone increased almost 6%. That is a surprising and pleasing number.
Equities Outlook: A Dollar Here, a Dollar There
- As we discussed a couple of weeks back, it is becoming a bit more difficult for U.S. companies to maintain earnings trajectory with the strong dollar dampening their international sales and profits. During this reporting season, a number of companies have mentioned this pressure – Microsoft, Procter & Gamble, Google, among others.
- Nonetheless, U.S. stocks had a generally good week last week, with both Blue Chips (S&P 500) and smaller stocks advancing.
- Foreign equities also ended up for the week, extending their gains from January.
Fixed Income Markets: The Interest You Pay
- European yields out to about five years in maturity trades at a negative yield. You have to pay Nestle almost 1% interest currently to hold your money. One third of the Euro-zone sovereign debt is trading currently with a negative yield.
- There was a noticeable move up in U.S. bond yields after the good jobs report on Friday, with the ten-year Treasury bouncing up to 1.94% during the day. The 30-year Treasury traded above 2.5%.
- The interest rate on the Ten-Year U.S. Treasury Note ended last week at 1.89% on Friday. Despite some gyrations, this is a bump up from where it closed the two weeks previous, at a yield of 1.80%. We will see if this level proves to be the bottom.
The Week Ahead
- U.S., NFIB Small Business Optimism Index
- U.S., Retail Sales (Census)
- EU, Industrial Production (Eurostat)
- EU, GDP First Estimate